Venezuela: A Sudden Plunge In Oil Production?

corporate_mike

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Wed May-03-06 09:21 AM
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Venezuela: A Sudden Plunge In Oil Production?

Is Venezuela's oil production rapidly waning? One source reports that the world's fifth largest oil producer is showing signs of a rapid decrease in production, one of the key tenets of the peak oil theory.

Venezuela is buying oil from Russia in order to avoid defaulting on deliveries to clients. The situation raises serious questions about the country's oil production and the future of PDVSA as a major oil producer, and increases the risk to the U.S. oil supply should the country's oil production suddenly plummet.

According to the Financial Times: "Venezuela, the world's fifth-largest oil exporter, has struck a $2bn deal to buy about 100,000 barrels a day of crude oil from Russia until the end of the year. Venezuela has been forced to turn to an outside source to avoid defaulting on contracts with "clients" and "third parties" as it faces a shortfall in production, according to a person familiar with the deal. Venezuela could incur penalties if it fails to meet its supply contracts."

The news has so far been very much inside baseball, as it has not made the mainstream, due to competition from more sensational stories such as the illegal alien marches, and the media's obsession with oil company profits.

But, as these things go, we may be on the verge of a major developing story.

Are There More Irregularities Hidden Inside PDVSA?

PDVSA is a center of financial and political intrigue, as it is the hub of Mr. Chavez' political ambitions. The Venezuelan government uses the proceeds from oil sales to finance Chavez' Bolivarian revolution, in essence the spread of the hybrid Socialism espoused by Chavez and Fidel Castro.

Yet, despite the secrecy, over the last few years numerous questions have been raised, not just about PDVSA's actual oil reserves and production capacity, but also about PDVSA's finances.

In 2005, we wrote about "Venezuela's oil receipts," and the significant questions being raised, including a "shortfall in PDVSA cash deposits to Venezuela's central bank" of "perhaps by as much as $2 billion."

The trail of that story grew cold, but the questions did not. In fact, little has changed. In 2005, we reported that the alleged shortfall was "not totally verifiable, since PDVSA has not filed papers with the SEC in at least two years."

Indeed, no one really knows what PDVSA's books really hold. As we reported recently, Venezuela is no longer going to report PDVSA's finances to the U.S. Securities and Exchange Commission.

The Times article confirms several points we made in May 2005 in our Marketwatch.com article, titled "Running on empty."

In the article we noted: <"Stratfor.com estimates that since Chavez became president, starting in 1998, "PDVSA has lost about 1.5 million bpd of its net crude oil production." The main reasons have been the replacement of capable engineers and workers who disagreed with Chavez's revolutionary views, with inexperienced, and in many cases incapable replacements, and the lack of attention to infrastructure maintenance and improvement. The result of the bad management and neglect, has been the steady erosion and near incapacitation of a major oil-producing region of Venezuela, the Western portion of the country, where as many as 10,000 wells have been estimated to have been rendered mostly useless. Venezuela is nominally the world's fifth largest oil producer.">

One year later, the Times reports: "The move suggests a growing gap between Venezuela's declining domestic output and its expanding contractual obligations to international customers."

According to the Times quoting "Under President Hugo Chávez, PDVSA's oil output has declined by about 60 per cent, a trend analysts say has accelerated in the past year because of poor technical management."

In our article Marketwatch article we suggested that Venezuela had a "potential inability to meet delivery of its oil contracts." Now, the Financial Times notes that "Mr Chávez's push to extend his influence throughout Latin America and the Caribbean with promises of cheap oil for friends and allies may be overstretching PDVSA's finances."

In that article we asked: "If Chavez' own oil production is only 50% of what it is supposed to be, where is all the money going to come from to pay for all his revolutionary adventures?"

http://www.rigzone.com/news/article.asp?a_id=31765